The rise in inflation will last longer than expected. For now, until 2028. And awaiting the 25 basis points interest rate hike announced by the European Central Bank (ECB) to take effect on September 16, this inflation forecast has had an immediate effect.
The public debt market, already turbulent due to worrying international prospects and continuously rising fuel prices, reacted on the same day the ECB spoke: in Spain, the yield on the ten-year bond rose to 3.963%, the highest since 2023. Meanwhile, the ten-year bond in Germany (a European benchmark) stood at 3.5%, returning to 2011 levels. The ten-year bond in France also returned to levels not seen since the 2008 financial crisis, closing at 4.431% yesterday.
In a scenario where inflation rises, and so do interest rates (as the ECB did yesterday but could also be done by the Fed before the end of the year), it poses a significant challenge for economic growth at all levels: it restricts consumer spending and business activities, as well as the financing of public administrations, whose fiscal policy leeway narrows due to increased financial costs and market reluctance to finance their public debt volume, as explained in the latest analysis by the Funcas think tank.
The reaction of the public debt market is not limited to Europe and its central banks: it has a ripple effect across the Atlantic, increasingly influenced by the Middle East crisis. Globally, State bonds have seen their yields soar to 3.72%, unseen since the 2008 financial crisis, according to data from Bloomberg Global Government Bond Index. The 30-year US bond yield reached 5.35%, its highest level since the 2007 economic crisis, attributed by analysts to a double blow: increased credibility risks and especially the continuous rise in oil prices. A situation that Donald Trump intends to prolong beyond the midterm elections in November, as he declared yesterday. In economies like Japan, yields have gone from almost zero to nearly touching 3% yesterday, a level not seen since the 1990s.
The surge in bond yields is not only due to higher inflation or tighter monetary policy. "Also contributing is the sense of governments' inability to contain the deterioration of budget imbalances and prevent an unsustainable accumulation of debt," explains Funcas. Increases in public spending on defense, state aid to cushion the impact of geopolitical situations, and less volatile social measures such as the cost of an aging population... All of these factors ultimately lead to the difficulty (visible) in generating sufficient income to finance that spending, resulting in a significant increase in financial costs that States will have to bear in the coming years, Funcas concludes.
"The main risk is that persistent pressures on energy and food prices drive up inflation expectations and increase the risk premiums demanded by investors," explain experts from Generali Investments, before adding: "Debt burdens continue to increase, and interest expenses are becoming an increasingly important budget item" for countries.
Meanwhile, the ECB's Governing Council decision yesterday to raise interest rates left the deposit rate at 2.5%, the refinancing operations rate at 2.65%, and the marginal lending facility rate at 2.90%. The ECB's verdict was clear: "The conflict in the Middle East continues to generate inflationary pressures, and inflation is expected to remain well above the target for an extended period." Thus, compared to the July meeting, they maintained inflation forecasts at 3% for 2026, raised to 2.5% in 2027, and 2.1% in 2028. As for the underlying inflation rate (excluding energy and food), it was set at 2.5% in 2026, 2.6% in 2027, and 2.3% in 2028.
Therefore, the ECB is tightening its policies for the second half of 2026, which will not be easy for the Old Continent. "Outlooks remain subject to high uncertainty, with upside risks for inflation and downside risks for economic growth," explained the institution chaired by Christine Lagarde after implementing the second rate hike of 2026, a measure not taken since 2023 and heralding a cycle of pressure on consumers' wallets after years of cuts or stagnation. However, above all, it is a preventive response from the ECB until there is a definitive solution to the Strait of Hormuz reopening and inflation is controlled, which also carries its own risk: economic activity deteriorating under more restrictive financial conditions, already immersed in an energy price shock and an unstable outlook.
Meanwhile, another pressure is growing, that of all prices, stemming from the rising cost of raw materials. Yesterday, the West Texas Intermediate (WTI) oil price, a US benchmark, surpassed $100 per barrel after a 5.7% increase during the day. In Europe, the Brent oil price surged by 5.5% and exceeded $107 per barrel during the day (levels not seen since May), while natural gas reached prices not seen since December 2022, the year its cost skyrocketed following the Russian invasion of Ukraine, triggering an ongoing energy crisis: it traded at ¤81.70 per megawatt-hour at market close due to a 3% intraday spike.
The fluctuation's origin lies once again in Middle East tensions and how the blockade of Hormuz continues to push fuel prices upward. Additionally, concerns are rising about the reserves countries will have for the upcoming winter, and uncertainty is fueled by new attacks on oil companies or the news that Saudi Arabia (an OPEC member) produced 6.2 million barrels per day in August, the lowest monthly figure in 2026 and 23% lower than July, a decline offset by Iraq's production within the alliance.
Spain's Case and Inflation Surge
In this context of increased indebtedness, and "in the absence of new budgets allowing priorities to be adjusted to major challenges, interest payments will increase by almost 50% by 2030, exceeding ¤60 billion that year," Funcas specifies for Spain.
"If interest rates remain at the same levels as in 2025 (around 3.2% for long-term and 2.2% for short-term), interest payments in 2030 would amount to around ¤57 billion, i.e., ¤17 billion more than in 2025," continues the think tank. Taking into account the 0.5% interest rate hike already implemented by the ECB in 2026, the bill increases by another ¤3.6 billion in 2030, slightly exceeding ¤60 billion.
narrowing margin of maneuver for States, a situation that also coincides with growing investment needs and the need to respond to all kinds of shocks. The implication for Spain is the urgent need to take advantage of the expansionary cycle to create leeway and reduce vulnerability to future shocks," they conclude.